Income, Risk, and Consumer Demand for Healthcare
Why is the depreciation of capital good a cost of society? In what ways does a person’s health depreciate?
Depreciation is the way to track the wear and tear of assets over time. Now, only those assets which are defined as being capital goods can depreciate. The capital goods will provide value or generate income for the company over a period of time normally greater than one year. The depreciation of capital goods requires knowing three different variables: the original cost of the asset, the salvage value of the asset and the life expectancy of the asset. All three of these variables help the organizations or companies to determine ...view middle of the document...
With the passing of time, health depreciates at some source of rate. The marginal benefit of health capital is the rate of return from this capital in both market and non-market sectors. In Grossman’s model, the optimal health stock can be impacted by factors like age, wages and education (Folland, Goodman, and Stano; 2001). However when looking into the age factor, we know that depreciation increases with age, so it becomes more costly to attain the same level of health capital or health stock when we age and as a consequence the optimal health stock and the marginal benefit of the health would decrease.
According to Grossman (1972), “The total cost is minimized when the increase in gross investment from spending an additional dollar on medical care equals the increase in gross investment from spending an additional dollar on time” (Pg.17). Now, health capital falls over the life cycle, however the gross investment can increase, decrease or even remain constant. This happens when a rise in the rate of depreciation (as we age our health depreciate) reduces the amount demanded of health capital and the capital supplied to consumers by a given amount of gross investment. The gross investment on health would have to increase in order to obtain a higher health stock or capital.
List at least three factors that might increase an individual’s marginal efficiency of investment in health capital.
Some factors that might increase an individual’s marginal efficiency of investment in health capital are education, wage rate (work), preventive care, exercise, and dieting. Education is assumed to improve the efficiency to produce health investments by having a better knowledge of harmful effects of certain risk behaviors for example: smoking, drinking alcohol. This knowledge can provide a better understanding of medical instructions. It will raise the direct inputs of marginal product, generating investments in health at less cost. An educated person also recognizes the benefits of a good health. They may also enjoy feeling, looking good and having a greater taste for health.
Wage rate also increases the individual’s marginal efficiency of investment in health capital by increasing the returns obtained from healthy days. Increases of wages tend to increases the optimal capital stock and increased substantially the marginal efficiency investment (Folland, Goodman, and Stano; 2001).
Lastly preventive care, exercise, and dieting increases the individual’s marginal efficiency of investment in health capital. Preventive care increase by schooling, tends to increase the use of screening services resulting in a more efficiently health production (Folland, Goodman, and Stano; 2001). Exercise and dieting promotes good health resulting in a reduction of medical expenditures and a higher earning by increasing productivity.
The deductible feature of an insurance policy can affect the impact of moral hazard. Explain this in the context either of...